Fine Print: What’s Coming For New Jersey Taxpayers As New Cuts Take Effect

Phasing out the estate tax gives big breaks to the richest, while cutting the sales tax benefits everyone a little

What is going on? From property tax bills to corporate income-tax rates, New Jersey has a reputation for having some of the nation’s highest taxes. But starting on January 1, several new tax breaks are set to go into effect in New Jersey thanks to the sweeping deal that Gov. Chris Christie and Democratic legislative leaders reached earlier this year to renew the state Transportation Trust Fund.

What exactly is changing? While some tax-policy changes have already gone into effect as a result of the TTF deal, including a 23-cent gas tax hike that started on November 1 and an increase of New Jersey’s Earned Income Tax Credit that’s in place for the 2016 tax year, others aren’t scheduled to take effect until January 1. They include a slight reduction of the state sales tax, a more than doubling of the New Jersey estate-tax threshold, and a significant hike in the state income-tax exclusions for pensions and some other sources of retirement income. Since those cuts are being enacted in phases, more changes are scheduled for 2018 and beyond.

The sales-tax cut: The new tax policy that will impact most New Jersey residents starting in 2017 is a reduction of the state sales tax rate from 7 percent to 6.875 percent. The change will partially repeal an unpopular 1 percent increase that was enacted in 2006 by then-Gov. Jon Corzine, a Democrat, which lifted the rate from 6 percent to 7 percent. Christie, a Republican, had insisted on cutting the sales tax in negotiations with legislative leaders over the summer, and he initially sought a full repeal of Corzine’s 1 percent increase before ultimately deciding to compromise with lawmakers.

Under the compromise, the sales-tax rate is scheduled to be lowered first to 6.875 percent, and then again, to 6.625 percent, on January 1, 2018. The sales tax is the state’s second-largest source of revenue, behind only the income tax, and the nonpartisan Office of Legislative Services has estimated the first phase of the sales-tax cut will cost the state nearly $100 million during the remainder of the current fiscal year. Once fully phased in, the sales-tax cut is expected to cost nearly $600 million during the 2019 fiscal year, possibly causing problems for the term-limited Christie’s successor.

The estate-tax cut: Perhaps the most controversial tax reduction that was agreed to by the governor and lawmakers as part of the TTF deal is the one in the New Jersey estate tax, a levy on estates left by only the wealthiest of New Jersey’s nearly 9 million residents. Under the first phase of the estate-tax cut that begins on January 1, the estate-tax threshold will increase from $675,000, the lowest threshold in the country, up to $2 million. And the agreement also changed the way the threshold is applied to make it even more beneficial to the wealthy leaving behind large estates. Under the policy that will soon expire, the tax is applied to a full estate once the $675,000 threshold is surpassed. But the new law will shield the first $2 million from the tax, which is usually assessed several months after someone dies.

The estate-tax is also scheduled to be phased out altogether beginning January 1, 2018, and OLS projects a loss of $320 million in revenue in the 2019 fiscal year. But many supporters of the estate-tax cut are predicting the policy change could actually help the state budget by keeping more wealthy seniors in New Jersey during their retirement years. According to the New Jersey Society of Certified Public Accountants, nearly 75 percent of those who responded to the organization’s member survey last year said they had advised clients to leave the state to avoid the estate tax. This year’s survey found only 28 percent are advising clients to leave New Jersey, said Ralph Albert Thomas, the organization’s executive director and chief executive officer. But Jon Whiten, vice president of New Jersey Policy Perspective, a liberal think tank, said the loss of revenue from the estate-tax cut still won’t be worth it since it will dig the state into a deeper fiscal hole “mostly to benefit a few thousand inheritors of the largest 5 percent of estates in New Jersey.”

The retirement-income tax cut: The new tax break that will take the longest to phase in is the lifting of the state income-tax exclusion for pensions and other sources of retirement income. This cut, which won’t fully take effect until 2020, was a priority for Senate Stephen Sweeney (D-Gloucester) throughout the TTF negotiations with Christie and other legislative leaders. Right now, the state excludes up to $20,000 of retirement income from the state income tax for married couples filing jointly who have less than $100,000 of annual income. The exclusion is $15,000 for single filers and $10,000 for married individuals who do not file taxes jointly with their spouse. But starting on January 1, the retirement-income exclusions will double, to $40,000 for married couples filing jointly, $30,000 for single filers, and $20,000 for married individuals filing separately. And the exclusions will eventually increase to $100,000, $75,000 and $50,000, in 2020. But unlike the estate-tax policy change, once retirees get over the $100,000 threshold, their entire retirement income will be subject to the state income tax.
OLS estimates the new retirement-income exclusions will cost the state up to $90 million during the 2018 fiscal year, and up to $130 million during the 2021 fiscal year.